Despite Challenges, Hilcorp Moves Forward With Arctic Drilling Plans

With oil prices falling to levels not seen in more than a decade and Arctic drilling efforts halted by major companies such as Royal Dutch Shell, Houston-based Hilcorp’s latest proposal to build a gravel island for oil extraction off the shores of Alaska appears surprising. But if all goes according to plan, the so-called Liberty Project could mark the first instance of petroleum production in federal waters in the Arctic. Other man-made offshore developments already exist in the area including Endicott Island and the Northstar Island—but they sit, at least in part, in Alaskan state waters.

If all goes according to plan, Hilcorp’s Liberty Project could mark the first instance of oil production in federal waters in the Arctic.

Hilcorp’s Liberty project is now beginning its review under the National Environmental Policy Act (NEPA) after its development plan was recently deemed complete by the Bureau of Ocean Energy Management. The project is slated to be a 23-acre island in Foggy Island Bay, some 15-miles from the oil-rich Prudhoe Bay. Sitting just six miles from the coast at a shallow 19-foot depth, the company plans to use the island essentially as a drilling platform to reach the between 80 and 130 million barrels of recoverable light oil that BP discovered on the spot back in 1997. Hilcorp purchased 50 percent of the assets for the field from BP just last year. If approved, Liberty Project will see peak production at around 60,000 barrels per day from a total of five production wells, Hilcorp estimates.

Shell quits, but Hilcorp sees potential

Why has Hilcorp been able to progress with its Alaskan drilling project while Royal Dutch Shell—a much larger company with much deeper pockets—had to abandon its Arctic ambitions in the Chukchi Sea earlier this year?

Why has Hilcorp been able to progress with its Alaskan drilling project while Royal Dutch Shell—a much larger company with much deeper pockets—had to abandon its Arctic ambitions in the Chukchi Sea earlier this year?

“Oddly enough, small companies are always the bigger risk takers. They have less to lose, they’re smaller, and the investors who back them see it as a lottery: You spend a little money with a big upside. That’s what they’re doing,” says Douglas Reynolds, oil and gas industry expert and professor of economics at the University of Alaska Fairbanks School of Management. “Bigger companies aren’t going to make those risks now when they’re cutting back. Smaller companies are more agile: They’re willing to try something new in order to get an advantage.”

Reynolds sees Hilcorp’s strategy as a positive development. Since the company lacks the visibility of a Shell or a BP, it’s able to undertake an initiative such as the Liberty Project without courting the same type of criticism or scrutiny that a larger company would. Furthermore, as one of the country’s largest privately-held oil and gas companies, it has more latitude to invest in an asset like the Liberty Project. But putting aside business concerns, Reynolds notes that constructing a gravel island offers tremendous advantages from an operations perspective.

“You have much more stability on the [island] and it’s much harder for any ocean current to come and cause a breakage,” Reynolds said. “It’s so much safer and if they have a spill, it’s much easier to contain because it’s a spill on a little piece of land and not the water.”

Since Hilcorp lacks the visibility of a Shell or a BP, it’s able to undertake an initiative such as the Liberty Project without courting the same type of criticism or scrutiny that a larger company would.

Brent Sheets, research manager for the Alaska Center for Energy and Power at the University of Alaska Fairbanks, sees the Liberty Project’s use of an island as particularly strategic in the Arctic winters.

“When you’re dealing with the Arctic, you’ve got ice moving in and out,” Sheets explains. He notes that Shell’s exploration efforts in the Chukchi Sea would have likely been able to have operated for only around 90 days out of its five-year lease due to the climate in the area, making it difficult to economically justify the project. “By putting an island out there, you can drill 12 months of the year. Ship-based drilling doesn’t give you that option.”

Sheets also explains that Shell’s operation in the Chukchi was an oil exploration program whereas in the Liberty Project, the exploration has already been completed.

“[Hilcorp is] moving into production which is an entirely different thing than what Shell was doing,” Sheets says.

But, naturally, no drilling program in the Arctic—or anywhere else, for that matter—is without its risks. Oil and gas industry historian and expert R. Tyler Priest tells The Fuse that once oil gets trapped under the ice, it can be very difficult to clean if there’s a spill. However, the gravel island does provide a somewhat better safeguard than drilling platforms in the middle of the ocean.

“Anytime you’re not floating on the water it’s safer,” says Priest, associate professor at the University of Iowa and former senior policy advisor to President Obama’s National Commission on the BP oil spill. “But the risks of blowout or some kind of failure in drilling aren’t any less.”

Why drill when oil prices are so low?

Environmental risks aside, with oil prices at historic lows, the biggest risk of all might seem to be an economic one: Why undertake any ambitious oil projects at a time like this?

“Some would argue that it’s better to do things now in this [oil price] environment so that when things swing the other direction, you’re ready for production.”

“The environmental impact statement is going to take several years to complete. The time they get first oil could be 10 years from now,” Sheets explains. The environmental review is slated to continue until at least 2017 with production not likely to begin for another several years. “Some would argue that it’s better to do things now in this [oil price] environment so that when things swing the other direction, you’re ready for production…You have to take a long term view of oil prices…If you wait until a higher price environment is there to develop, you might miss that window of opportunity.”

Priest echoed Sheets’ perspective on why now may be a good time to undertake this sort of project.

“You haven’t seen a huge slowdown…because [these projects] are planned at least in the 10-year horizon,” Priest explains. “You wouldn’t be able to do anything if you were constantly responding to short-term prices.”

While Priest strikes some doubt that prices are going to rise any time soon, he does note that any oil project in the area would be important for the nation’s energy supply in the long term—especially in terms of keeping the Trans-Alaska Pipeline System up and running.

“Alaska is important, I think, in the long term. There are large estimates of potentially undiscovered oil and gas [in Alaska]. It is perhaps the last virgin frontier in the U.S. for conventional kinds of oil,” Priest explains. “Based on some of the projections I’ve seen, if there isn’t new throughput in the Trans-Alaska Pipeline, it would have to shut down by 2020. So I don’t even know that this project could save it but it would help maintain some momentum which is important.”

As Reynolds puts it, keeping the Trans-Alaska Pipeline up and running is important for U.S. energy security.

Hilcorp’s project would directly feed the Trans-Alaska Pipeline, and it would move any extracted oil first through an underwater pipeline to land and then onshore until it reaches the Trans-Alaska Pipeline. According to its website, the Liberty Project will be essential to keeping the pipeline operational for decades. Once production has concluded, Hilcorp says that it will plug the wells and allow the ocean to gradually erode and retake the island.

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The Fuse is an energy news and analysis site supported by Securing America’s Future Energy. The views expressed here are those of individual contributors and do not necessarily represent the views of the organization.

Issues in Focus

Safety Standards for Crude-By-Rail Shipments

A series of accidents in North America in recent years have raised concerns regarding rail shipments of crude oil. Fatal accidents in Lynchburg, Virginia, Lac-Megantic, Quebec, Fayette County, West Virginia, and (most recently) Culbertson, Montana have prompted public outcry and regulatory scrutiny.

2014 saw an all-time record of 144 oil train incidents in the U.S.—up from just one in 2009—causing a total of more than $7 million in damage.

The spate of crude-by-rail accidents has emerged from the confluence of three factors. First is the massive increase in oil movements by rail, which has increased more than three-fold since 2010. Second is the inadequate safety features of DOT-111 cars, particularly those constructed prior to 2011, which account for roughly 70 percent of tank cars on U.S. railroads. Third is the high volatility of oil produced from the Bakken and other shale formations, which makes this crude more prone towards combustion.

Of these three, rail car safety standards is the factor over which regulators can exert the most control. After months of regulatory review, on May 1, 2015, the White House and the Department of Transportation unveiled the new safety standards. The announcement also coincided with new tank car standards in Canada—a critical move, since many crude by rail shipments cross the U.S.-Canadian border. In the words DOT, the new rule:

Since the rule was announced, Republicans in Congress sought to roll back the provision calling for an advanced breaking system, following concerns from the rail industry that such an upgrade would be unnecessary and could cost billions of dollars. The advanced braking systems are required to be in place by 2021.

Democrats in Congress have argued that the new rules are insufficient to mitigate the danger. Senator Maria Cantwell (D-WA) and Senator Tammy Baldwin (D-WI) both issued statements arguing that the rules were insufficient and the timelines for safety improvements were too long.

The current industry standard car, the CPC-1232, came into usage in October 2011. These cars have half inch thick shells (marginally thicker than the DOT-111 7/16 inch shells) and advanced valves that are more resilient in the event of an accident. However, these newer cars were involved in the derailments and explosions in Virginia and West Virginia within the past year, raising questions about the validity of replacing only the DOT-111s manufactured before 2011.

Before the rule was finalized, early reports indicated that the rule submitted to the White House by the Department of Transportation has proposed a two-stage phase-out of the current fleet of railcars, focusing first on the pre-2011 cars, then the current standard CPC-1232 cars. In the final rule, DOT mandated a more aggressive timeline for retrofitting the CPC-1232 cars, imposing a deadline of April 1, 2020 for non-jacketed cars.

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DataSpotlight

The recent oil production boom in the United States, while astounding, has created a misleading narrative that the United States is no longer dependent on oil imports. Reports of surging domestic production, calls for relaxation of the crude oil export ban, labels of “Saudi America,” and the recent collapse in oil prices have created a perception that the United States has more oil than it knows what to do with.

This view is misguided. While some forecasts project that the United States could become a self-sufficient oil producer within the next decade, this remains a distant prospect. According to the April 2015 Short Term Energy Outlook, total U.S. crude oil production averaged an estimated 9.3 million barrels per day in March, while total oil demand in the country is over 19 million barrels per day.

This graphic helps illustrate the regional variations in crude oil supply and demand. North America, Europe, and Asia all run significant production deficits, with the Middle East, Africa, Latin America, and Former Soviet Union are global engines of crude oil supply.